I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

Contra Piketty Sweden Is More Unequal Than Britain

Whether one place is more or less unequal, has a greater level of inequality, does depend rather on what it is that you’re measuring. Income inequality is always less than wealth inequality in any given place, this is true. But that doesn’t mean that one place with lower income inequality will necessarily have lower wealth inequality. So I’m afraid that this little piece in support of Thomas Piketty by Kenneth Thomas is making a logical leap that isn’t in fact supportable:

Most notably, there has been only one significant challenge to Piketty’s data, and it was easily swatted down. Chris Giles of the Financial Times claimed that wealth inequality in the United Kingdom had declined since 1980, not risen as given in Piketty’s book. But Giles made the error of taking survey-based wealth data (which sharply underestimates the wealth of the rich) and splicing it on to much more accurate estate tax-based data, to get a declining share of wealth for the top 10% and the top 1%. As Piketty says in his response:

Also note that a 44% wealth share for the top 10% (and a 12.5% wealth share for the top 1%, according to the FT) would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden has ever been (including in the 1980s). This does not look particularly plausible.

Obviously I agree with Piketty, but don’t take my word for it. According to Eurostat, the Gini index for income inequality (which runs from 0 to 1, but is often multiplied by 100, as here; higher is more unequal) in 2012 was 32.8 for the United Kingdom versus 24.8 for Sweden. (For comparison, the United States was at 45.0 in 2007, according to the CIA World Factbook.) Combine that with the fact that wealth is more unevenly distributed than income in every country, and it is impossible for U.K. wealth to be more equally distributed than Sweden’s is today, let alone at its most equal point in the 1980s. Moreover, according to Piketty’s data on Sweden, which Giles does not dispute, the top 10% there owned just a tad under 60% of wealth, and the top 1% fully 20% of wealth, in 2010 (Figure 10.4, p. 345).

It’s that impossible there that’s at issue. And I’m afraid that it is possible for wealth in Sweden to be more unequally held than wealth in the UK, even while income inequality is smaller. We know this to be true for we can go and look up the wealth gini for Sweden as we can do for the UK. They’re listed here (a secondary source but good enough for us here). With the gini a higher number means more unequal: Sweden 0.742, UK 0.697. Wealth is distributed more unequally in Sweden than in the UK.

Agreed, this isn’t how we would normally think of it and that the US is even more unequal (0.8 and above) accords more with our general world view. However, there’s a couple of reasons why this happens but before those two a point about the comparisons that Thomas is using for the income inequality numbers there.

The Swedish and UK numbers are after the influence of the tax and benefit systems (but before the influence of all government spending like free schooling and so on). The US number is a little different: at 0.45 for income inequality that’s correct for market incomes after some part of the tax and benefit system. However, it doesn’t include the effects of the four major anti-poverty (which is not exactly the same as but very close to the plan to redistribute income around the country and thus lower the gini) programs in the US. It doesn’t include the effects of Medicad, SNAP or Section 8 housing vouchers, as they are benefits in kind, nor the EITC which operates through the tax system. It does include what’s left of cash welfare payments, Social Security and so on, but not all that the welfare state does to reduce inequality. Those Swedish and UK numbers are including the effects of everything that is done. If we correct the US for that partiality of inclusion then we get an income gini of around 0.38. Yes, higher, yes, possibly too high, but still notably different from what is usually quoted.

As to the wealth inequality in Sweden being higher than in the UK the first cause is called “the Wallenbergs”. One single family has its fingers in the Swedish economic pie in a manner that almost no other economy does. It’s said that at one point they controlled 50% of the entire Swedish stock market (no, not owned 50%, but held a large enough position in 50% of the stocks that they were able to direct activity).

But the more important point is perhaps that those income numbers are (only partially for the US) about inequality after what we do to reduce it. Those wealth numbers are before whatever it is that we might do to reduce inequality.

Let me try to make this clear with an example, pensions. We could go off and measure all the savings that people have put aside for their retirement. We could then present this as “pension inequality” if we wanted to. We could also present it as wealth inequality. But in most places in the rich world there’s two entirely separate pension systems. One is those private savings that people have, the second is some form of state paid or at least state guaranteed pension (like Social Security in the US). In either an accounting or economic sense those two sets of savings are, as a matter of wealth to the holder, equivalent. Whether it’s my IRA that pays me, out of the money I’ve saved over the years, $6,000 a year or whether it’s my Social Security contributions that pay me $6,000 a year I’m still getting $6,000 a year. And we can also look at both of those and say they have an equivalent capital value. An inflation adjusted annuity (roughly what Social Security is) will cost me a capital sum of $100,000 (that’s using current UK rates but the results will be similar elsewhere) for an annual income of $6,000. We can thus say that my right to $6,000 a year from Social Security has a capital value of $100,000. They’re all really the same statement.

However, when we go around counting the wealth in the economy we do look at those private pension savings: but we don’t include the capital value of those state pensions. Despite their being, to the recipients of the income from them, one and the same thing. This is only one example of my point which is that wealth inequality is subject to huge revisions depending upon how exactly you’re going to count it. Just adding in the state pension drops the 90/10 ratio for the UK (average wealth of the top 10% of households to average wealth of the bottom 10% households) from 100 to 1 down to 9 to 1. And there’s many more things that can be considered to be wealth as well: a lifetime tenancy on a house at below market rent is wealth in my book.

The end point here being that contra what Piketty (and Thomas) are saying, market wealth inequality in Sweden is higher than it is in the UK. And sure, you can adjust for what we do to reduce that inequality (for redistributing income is indeed a redistribution of wealth as long as those income streams are permanent) and you’ll end up showing that Sweden is less unequal in a real sense than the UK is. But here’s the rub: if you’re going to do that then you’ve also got to adjust your wealth numbers in the UK, US and so on for that redistribution that already takes place. And that’s something that Piketty notably fails to even consider in his book. He ignores the existence of the welfare state and the fact that said existence already redistributes wealth.

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